Global equity markets rallied this week, extending the rebound that began in late April. The recent gains have pushed the U.S. market up more than 15% from its lows, bringing it back to around the levels seen at the start of 2025. The tech sector has led the charge higher, while other regions like Europe, Australia and emerging markets also posted modest gains of 1-2%.

The primary catalyst boosting sentiment was progress on the trade front between the U.S. and China. High-level talks in Geneva over the weekend resulted in an agreement to dramatically lower tariffs on both sides from their prohibitive post-Liberation Day levels. While tariffs will remain elevated compared to before early April, the deal reduces them to a more manageable 30% on Chinese goods entering the U.S. and 10% on U.S. exports to China. This 90-day truce eases fears of a severe trade shock.

Risk assets also got a lift from hopes that the Geneva accord could pave the way for further deals with other key trading partners. President Trump's trip to the Middle East this week produced a massive $142 billion arms agreement with Saudi Arabia. There is also talk that trade packs with Japan, South Korea and potentially even the EU could be on the near-term horizon as the White House pivots to a more conciliatory approach.

However, beneath the surface, the fundamental economic picture may not have improved as dramatically as the 10-15% U.S. market surge suggests. Much of the rally appears to be driven by technical factors like short covering from previously bearish hedge funds and systematic strategies having to chase momentum. Dividend futures show that while near-term dividend expectations have recovered, the longer-term outlook remains subdued. Earnings estimates are also still tracking lower.

In fixed income, long-term bond yields continued their gradual ascent, with 10-year Treasuries and Australian government bond yields rising above 4.5%. The move seems to reflect concerns about looser fiscal policy and larger deficits stemming from the "Beautiful Bill" winding its way through Congress. With momentum building behind making Trump's 2017 tax cuts permanent and new spending on the table, markets are contemplating the prospect of increased Treasury supply even as the growth outlook remains uncertain.

In Australia, the RBA is universally expected to cut interest rates by 25bps at its upcoming May meeting, with markets pricing in three more easings over the remainder of 2025. This should provide support to the housing market and sectors like banking. However, with net interest margins already at healthy levels, banks will likely pass through most of the rate cuts to borrowers.

Overall, risk appetite has clearly returned on hopes the worst-case trade scenarios can be avoided. But with many of the structural issues still unresolved and the lagged impacts of the tariff battle yet to be fully felt, it remains to be seen if the newfound optimism can be sustained. Markets may be getting ahead of fundamentals in the near-term, setting the stage for renewed volatility.